Do Mortgage Subsidies Help or Hurt Borrowers?

Abstract

Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price responses attenuate efficiency losses. My results provide broader methodological insights into the welfare analysis of credit policies.JEL classification: H22, R21, R28.

Quantitative Easing, Collateral Constraints, and Financial Spillovers

“…This resembles the recent study byRappoport (2016) that shows how mortgage subsides can possibly lower the welfare of borrowers: while debt subsidies ease borrowers' access to home loans, the associated increase in house price can counteract the beneficial effects of the subsidies.…”

Implications of US Tax Policy for House Prices, Rents, and Homeownership

“…3 Other recent papers have used alternative frameworks to study the effect of the mortgage interest deduction on the housing market. Of note, Rappoport (2016) analyzes the incidence and efficiency loss from mortgage subsidies in a theoretical model with endogenous housing supply. Similar to this paper, he finds that the mortgage interest deduction hurts first-time home buyers by increasing house prices.…”

The Effect of Interest Rates on Home Buying: Evidence from a Discontinuity in Mortgage Insurance Premiums

“…Rappoport (2016) models the process by which interest rate subsidies get capitalized into house prices, offsetting much of the benefit of the subsidy to borrowers.…”